USD/JPY surges towards ‘that high’ post BOJ: Asian Open – 1/11/2023

Market Summary:

• Druckenmiller has become the latest prominent trader to announce a bullish bet on the bond market, telling a conference last week that he has a “massive” position on the 2-year note due to his concerns for the economy. This follows on from Bill Ackman announcing his closer of his short bond bet and Bill Gross bullish outlook on bonds.
• Regardless, US bond yields continued to rise across the yield curve, helping the USD retain its spot as the strongest forex major on Tuesday while JPY, CHF and AUD were the weakest.
• Inflation data from Germany, France and the eurozone came in softer than expected, as did GDP for the eurozone at -0.1% q/q and just 0.1% y/y
• This bolstered bets that the ECB are done with hiking rates and, dare we say, closer to a recession and therefore the potential for rate cuts (as far off as they may seem)
• EUR/USD revered all of its earlier gains of the day after initially rising towards last week’s high, in line with yesterday’s bias. With US yields and the dollar rising, I’m now on guard for a break lower.
• AUD/USD continues to prattle around between 63c-64c, serving as a reminder that dips looks appealing near the low of the range and for profits to be booked nearer to the top. It remains difficult to be bullish yet at the same time difficult to write if off, given AUD/USD continues to hold above 63c despite negative headlines that should really sink it.
• Wall Street fell for a third consecutive month in October, although it managed to rally for a second consecutive day heading into month end. A reasonable assumption is the ‘rally’ is due to month-end flows and that bears on the sidelines are waiting for more favourable prices to fade into.
• The Bank of Japan tweaked their YCC slightly by further loosening its grip on the 1% band of their 10-year JGB, upping inflation forecasts and removing daily fixed-rate bond purchase operations. But the fact that USD/JPY rallied over 1.8% suggests traders were expecting their BOJ to abandon YCC altogether. Still, with such a rise into the infamous 2022 high, we could suspect the BOJ have their finger hovering over the intervention button.
• The RBNZ’s semi-annual financial stability report said it expected debt servicing costs for households and businesses to continue rising over the next year, and that the full impact of rate hikes are yet to be seen. This further solidifies the case that the central bank has reached its peak rate of the cycle.

Events in focus (AEDT):

• 08:45 – New Zealand employment
• 11:30 – Australian building approvals
• 11:30 – South Korea manufacturing PMI, trade
• 12:45 – China manufacturing PMI (Caixin)
• 23:15 – ADP nonfarm payroll
• 00:45 – ISM manufacturing PMI
• 05:00 – FOMC interest rate decision, statement
• 05:30 – FOMC press conference

ASX 200 at a glance:

• The ASX 200 tracked Wall Street lower for a third month, with October being the most bearish month of the three
• 10 of its 11 sectors declined, led by industrials and info tech whilst utilities were the only sector to post a modest gain
• Yet the ASX 200 posted a small bullish inside day on Tuesday and SPI 200 futures closed 0.5% higher, pointing towards a positive open for the cash index today and a potential cycle low around 6750
• Should we see a countertrend move, 6900 remains a key level of resistance that bears may struggle to resist fading into without a broad risk-on rally to support it

USD/JPY technical analysis (daily chart):

Tuesday was the best day for USD/JPY in eight months for USD/JPY, which is now pips away from testing 'that' infamous October 2022 high - when the BOJ intervened. So yes, we're on the lookout for intervention. But just how much volatility is the BOJ looking for before pulling the trigger? Yesterday's high-low range was ~50% of the October 2022 high, so as bullish as it looked initially - perhaps we'd need to see another day or two of bullish trade before intervention occurs, over simply looking at the 152 area. But we also know the market is watching 152 high, so at the very least I’d expect some volatility around these highs as the markets does its thing. Either way, USD/JPY remains a key level to watch.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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